UK tobacco: falter tips point to slow extinguishing of sector’s spark

Is the business model of big tobacco finally going up in smoke? The industry has been smouldering on by offsetting volume declines with price hikes. But tougher anti-smoking policies, of the kind announced by UK prime minister Rishi Sunak on Wednesday, highlight the limits of this strategy.  

Alongside Australia and New Zealand, the UK leads the pack in anti-smoking clampdowns. The percentage of smokers has fallen from 20 per cent in 2011 to 12.9 per cent in 2022.

Sunak’s plan to create a smokeless generation — by increasing the age at which it becomes legal to smoke in England by one year every year from 2027 — will accelerate this process. Four out of five smokers pick up the habit before they turn 20.

A back-of-the-fag-packet calculation suggests the policy would take out a big chunk of customers. There are 6.4mn smokers in the UK. Assume over-60s leave the pool over the next two decades and people currently under 20 do not join. Apply historic quit rates — of around 4 per cent a year — to residual smokers. That would leave 2-2.5mn smokers in the country, equivalent to an annual decline of 5-6 per cent.

These numbers ignore the limits of Sunak’s policy. It only applies to England, and may be hampered by delinquency. But they illustrate the difficulty for cigarette manufacturers, whose efforts to switch into vapes and e-cigarettes are faltering. A pack of cigarettes now costs almost £15, constraining for price hikes.

The good news, for big tobacco, is that the UK is a smallish market. Even for Imperial Brands, maker of popular local brands such as John Player Special, it only accounts for a high single-digit share of revenues. Other countries are unlikely to follow its lead at speed.

Moreover, tobacco companies throw off cash. Imperial generated £2.6bn after capex in 2022, equivalent to 17 per cent of its market value. Its new £1.1bn buyback is enough to retire more than 7 per cent of the stock.

As broker Panmure Gordon has noted, at this rate Imperial will run out of shares to buy long before it runs out of smokers.

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